Post 1: Dealing with the 'New Normal (22 April 2009)
The UK Budget announcement and reflections on a turbulent 12 months dominate conversation at the opening of the Association of Corporate Treasurers (ACT) conference in Manchester.
The first session of the Association of Corporate Treasurers (ACT) Annual Conference, in Manchester, UK, has begun against the backdrop of a flurry of interest around the Budget announcement from the UK Chancellor, Alistair Darling. Initial reactions to the Budget from many commentators has seen much comment on the vast levels of debt and public borrowing contained in it, while today has also seen the IMF predicting a deeper global recession ahead.
It seems, in that case, good timing for the main headline of this conference, Adapting, diversifying and sustaining - dealing with the new normal. The Chairman's opening remarks, from Gerry Bacon, deputy president of the ACT and standing in for Matthew Hurn, group treasurer, Mubadala Development Company, looked back one year to the previous conference, and how then no-one was anticipating the severity and length of the massive financial volatility that treasurers and banks find themselves facing today. The UK Budget is clearly aimed at calming this volatility, but the method of increasing borrowing as a way out of the crisis is certainly not welcomed by some quarters, who see borrowing as the main cause of the current exacerbated problems in the UK.
Initial conversations I've had with treasurers at the conference revolve around a general point of bemusement - "When will it all end?" Every day a new set of statistics, a report or a study finds ways to show just how bad the financial crisis is, both in the UK and globally. John Wood, head of balance sheet management EMEA at HSBC Holdings, bravely tried to tackle this question in half an hour, although even he had to duck behind the podium and drink some water after mentioning the phrase 'the Great Depression". Wood's main take on the 'new normal' of financial services is that things are going to get very boring for a long time if a route is to be negotiated out of the current turmoil - banks are turning inwards to get their houses in order before they can compete for new business, focussing on building up strong capital and liquidity bases. For treasurers too, Woods advised a back to basics approach - cash is king so make sure you know your cash position in every territory. Layered on top of this is the 'new normal' for treasury - practices such as global pooling that just two years ago may have seemed specialist are now mainstream, while corporates have to assess their banks as a counterparty risk.
As mentioned in the HSBC session - it's wrong to simply say that things can only get better. Treasury professionals need to consider the option that the current depressed market conditions will continue into 2010 and beyond, and have a contingency plan accordingly.
Post 2: 'Physician, Heal Thyself!' (22 April 2009)
RBS lecturing corporates on risk management? While the irony was lost on no-one, this presentation showed that the bank may be on the road to rehabilitation.
The Royal Bank of Scotland (RBS), the bank now 70% in the hands of the UK government, would seem on the face of it to be a strange organisation to advise corporates on their risk strategy. That was the unenviable situation that Paul Ward, head of EMEA, corporate coverage and advisory, global banking and markets at RBS, found himself in, presenting a main afternoon session on risk at the ACT Annual Conference 2009. As Ward himself alluded to, it is a little reminiscent of a health professional being told to diagnose and treat his or her own maladies.
Or, alternatively, what better organisation to learn from - one that made so many fundamental and grave errors in risk management it can offer corporates a blow-by-blow list of What Not To Do. Individuals and organisations of this type that have gone through the looking glass tend to crop up at conferences quite regularly, with mixed success. As anyone that’s seen Nick Leeson speaking at financial crime conferences might testify, it can be quite galling to see someone living a quasi-celebrity lifestyle on the back of being such a spectacular failure. What next, the Bernard Madoff webinar, live from incarceration? Actually, don’t give him any ideas.
Of course, the case is different for Paul Ward and RBS, as the bank has a new management since the government bail-out, and so his presentation today was not focused on ‘here’s what we did wrong’, rather, ‘here’s how we’re planning to climb out of the huge hole the previous guys dug’. The overwhelming message of the first half of his presentation was to reassure UK treasurers present that RBS is still there for them to do business with - yes the bank’s balance sheet is being reduced, but the vast majority of this is not in corporate business and, specifically, not in the UK.
The rest of the presentation offered some good common sense suggestions for corporates and their risk, including:
- Assess and measure all risks simultaneously and not in individual siloes.
- Take advantage of any funding opportunities when they arise.
- Consider accessing multiple sources of financing to spread funding risk.
- Avoid the cloud of refinancing and consider forward start facilities.
The ‘predictions’ part of the presentation began with the disclaimer that “the RBS crystal ball isn’t perfect”, which raised some laughter in the conference hall. But, in reality, whose crystal ball is perfect in the current financial climate? The problem that RBS, and other banks bailed out by governments around the world, face is how to recover from that stigma and how to convincingly demonstrate to current and prospective corporate clients that they are competitive with banks that are free from state interference. Rebuilding reputations takes as long as the original reputational damage dictates and, while RBS still lives under the shadow of previous bad decisions, today at least demonstrated the bank is focused on stepping into the light, albeit one step at a time.
Post 3: 'New Order' Bleak for UK (23 April 2009)
A private equities perspective on the UK recession gives a dark assessment of past financial misdeeds and current political attempts at a solution.
Day two of the ACT Annual Conference in Manchester began with a look at the position of the UK’s financial position in relation to the global economy. Presented by Jon Moulton, founder and managing partner of Alchemy, the session entitled 'The New Order in Finance' gave Moulton’s view on events from his private equities background.
So, how is the UK doing? Well, judging by the images flashing up from Moulton’s slideshow - the trenches of World War I, the Titanic (post-collaboration with the iceberg) and UK riots from the 1980s - its safe to say he is seeing the ‘new order’ as a frightening and volatile place, somewhere that the excessive risk taking and reckless abandonment of core banking principles has led us too.
Moulton explained how bonuses are now a critical risk factor for the regulators, that for too long massive incentives have led to massive risk taking, regardless of the results. By targeting this culture of rewarding risk rather than results, the financial services industry may start to learn and recover from the huge errors that have found UK plc in its current predicament.
A private equities perspective on the UK recession gives a dark assessment of past financial misdeeds and current political attempts at a solution.
Day two of the ACT Annual Conference in Manchester began with a look at the position of the UK’s financial position in relation to the global economy. Presented by Jon Moulton, founder and managing partner of Alchemy, the session entitled 'The New Order in Finance' gave Moulton’s view on events from his private equities background.
So, how is the UK doing? Well, judging by the images flashing up from Moulton’s slideshow - the trenches of World War I, the Titanic (post-collaboration with the iceberg) and UK riots from the 1980s - its safe to say he is seeing the ‘new order’ as a frightening and volatile place, somewhere that the excessive risk taking and reckless abandonment of core banking principles has led us too.
Moulton explained how bonuses are now a critical risk factor for the regulators, that for too long massive incentives have led to massive risk taking, regardless of the results. By targeting this culture of rewarding risk rather than results, the financial services industry may start to learn and recover from the huge errors that have found UK plc in its current predicament.
The regulators and their calls for transparency didn’t get off lightly from Moulton - Basel II is “bonkers,” the complex statistical models behind it are “mental masturbation,” and transparency in its current form “does NOT do it.” The point here is that it is all well and good to prove you are a transparent organisation by publishing a 300 page report on your accounts, your operating strategy, or your core values, but who in their right mind is actually going to read vast reams of statements and actually understand any of it by the time they reach the end? Transparency as a concept is a nice idea, but the approach should be to keep it simple and understandable. Many of the activities in investment banks and funds that brought about this recession were not even understood by the Board members of these institutions - a frightening reality of the time and a place we should not be seeking to return to.
As the UK is bereft of any major industry (apart from financial services, but they’re not really in a position to help out at the moment), the country is heading towards a far greater level of public debt as a percentage of GDP than other similar struggling economies. Here are some possible suggestions from Moulton as to what the UK might find itself getting in response to the crisis:
As the UK is bereft of any major industry (apart from financial services, but they’re not really in a position to help out at the moment), the country is heading towards a far greater level of public debt as a percentage of GDP than other similar struggling economies. Here are some possible suggestions from Moulton as to what the UK might find itself getting in response to the crisis:
- Lots more regulation (especially for hedge funds and private equities).
- Efforts to regulate the incomprehensible.
- Banks to take years to get sensible balance sheets - meaning a credit shortage for a protracted period.
- A serious loss of the Financial Services Authority (which provided 27% of UK tax revenues only a year ago).
- More debt - repackaged as quantitative easing, or other ‘euphemisms’.
- Inflation - to sort out the debt - but when?
- Lots of small gimmicks from the government - Moulton cited yesterday’s Budget as an example of this.
So, lots of fiddling round the edges, but certainly nothing to suggest a recovery any time soon and, if anything, the UK is still only at the beginning of a long period of economic woe. Chancellor Alistair Darling’s suggestion that the UK is on course for growth of 3.5% by 2011 was taken out and shot by Moulton shortly after the presentation.
Post 4: Treasurers' Focus in 2009 (23 April 2009)
Three senior European treasurers discuss their strategic focus for 2009.
One of the session tracks on the second day of the ACT Annual Conference examined the current focus of treasurers. Taking part in the debate were Magnus Attoff, head of financial risk management and treasury controlling at Ericsson, Malcolm Cooper, group tax and treasury director, National Grid, and Bob Williams, group treasurer, Barratt Developments.
The number one strategic focus at National Grid is a familiar issue to treasurers today: funding. National Grid currently has a debt level of £22bn, and this is rising by approximately £1bn every year. To accommodate this, Cooper needs funding of £2-2.5bn per year. The debt at its current level is manageable in this way, and Cooper also demonstrated how increasing the debt level could have a negative effect on funding - if National Grid increased its debt level by £5bn, this would have a negative effect on the organisation’s credit rating. In turn, this downgrade would limit the access he has to funding markets, making the prospect of deliberately increasing debt on a large scale unthinkable for National Grid.
Cooper’s second strategic focus is on risk management. He explained that this issue is now so important at an organisational level that he’s finding himself making presentations to the Board every month! This is a good example of the rising profile of the treasury function within the organisational structure. The perception of treasury has changed within business, with executives now asking the question ‘what’s the impact on cash’ in their strategic planning, something that rarely, if ever, happened before. As was commented from the stage, if you can’t make a success in the role of treasurer in the current spotlight, there’s probably no hope for you.
Williams from Barratt finds himself in an industry particularly hard hit by the current economic downturn, with the mortgage markets in the state they are in, house builders are cancelling or postponing a large amount of projects. Barratt also had a large refinancing programme last year as part of M&A activity. Williams’s main advice to treasurers is to work hard on your bank relationships. He provides quarterly reports to his key banking partners, as well as some monthly reports too, in an effort to ensure that the banks never face any surprises. By ensuring a high level of communication to core banking partners, treasurers can strengthen these relationships in the bad times and come out of the other end of this credit drought (whenever that may be) in a positive position.
Ericsson’s Attoff made the following helpful points about how treasury can keep a flexible risk strategy:
Post 5: Ethical Perspectives on the Changing Financial Landscape (23 April 2009)
What can public companies learn from the co-operative business model? Well, quite a lot actually, especially in the credit crisis.
Day two of the ACT Annual Conference in Manchester drew to a close with a presentation from Martyn Wates, CFO of the The Cooperative Group (the Co-op). The Co-op is headquartered in Manchester, so the speech gave a real local flavour to the event. To start proceedings, Wates outlined the differences in business models, which you can see in the following table.
Ericsson’s Attoff made the following helpful points about how treasury can keep a flexible risk strategy:
- Separate commercial flows from trading.
- Frequently carry out back testing to identify exposures generating results.
- Identify complimentary risk measures to compliment VaR in order to monitor risks that are not covered.
- Take the bigger picture and look at exposures outside of those that are actively managed.
- There are no 'free lunches', you need to understand the reasons for results (return on risk).
Post 5: Ethical Perspectives on the Changing Financial Landscape (23 April 2009)
What can public companies learn from the co-operative business model? Well, quite a lot actually, especially in the credit crisis.
Day two of the ACT Annual Conference in Manchester drew to a close with a presentation from Martyn Wates, CFO of the The Cooperative Group (the Co-op). The Co-op is headquartered in Manchester, so the speech gave a real local flavour to the event. To start proceedings, Wates outlined the differences in business models, which you can see in the following table.
Wates stressed the point that the Co-op follows a ‘profit with a purpose’ mantra, that members won’t gain individual wealth from owning shares but rather that profits are ploughed back into local communities (no pun intended) and used to offer fair terms to suppliers. And while that might not be exciting, it is worth remembering that one of the largest co-operative societies in the world is FC Barcelona, and nobody could accuse their members of lacking passion!
Not that Wates was trying to convince the treasurers in the room to go back to their offices and create a revolution in their strategic planning by implementing a ‘one member one vote’ shareholder scheme. Rather, he was using the example of the Co-op’s operating practices to show how by being honest and transparent with shareholders, banks and business units, treasurers can enhance their standing within their organisation and, in turn, enhance their organisation’s reputation. Here’s a list of key points Wates believes we have learnt as a result of the financial crisis:
- Relationship banking is win/win for both parties.
- Provide timely management information, such as half-year and full-year events, budget and plan, and ensure there are no surprises waiting for your bank or shareholders to discover.
- The role of treasurer/CFO requires total transparency and trust/stewardship. Finance directors are the stewards of their organisation, holding the baton for a certain period of time before handing it on - don’t drop the baton.
- Manage covenants/manage the business. Wates suggested that you could only make your business better if you make changes in real life, which requires getting into the details of how your company is operating. At a time when some senior bankers freely admit they had no idea regarding the types of financial instruments they were involved with, it’s plain to see what can happen if you abrogate your responsibility.
- Be flexible. No one can predict the future, especially in the current financial landscape, so make sure you have a clear vision of where your business is going, and do the right thing.
Post 6: Adapting to a Start-up Environment (24 April 2009)
Start-up companies face a daily quest for survival before they are able to turn a profit. This situation is now starting to feel alarmingly familiar to mature corporates too.
Barbara Cassani, executive chairman at Jurys Inns, used her presentation on day three of the ACT Annual Conference in Manchester to share the lessons she had learnt from founding Go Airlines as a start-up business, having previously spent 10 years working in a mature, market-leading multinational, British Airways. The point of the presentation was to show how the start-up environment - and the volatility and huge challenges it presents - is fairly similar to some of the conditions that mature and stable businesses and industries are facing today as a result of the credit crisis. As Cassani introduced it: “How do you recalibrate your business for the new reality?”
Now that the good times are over, corporates need to manage their operations cleverly and examine what makes their own brands successful in order to negotiate the current turmoil and succeed. Using an example from her Go experience, Cassani told the audience that, in the start-up environment, it was critical to fix any mistakes fast and to keep a keen eye on the company’s cash position. There shouldn’t be a blame culture attached to strategic mistakes as long as they are identified early, put right, and not made again. Go nearly went out of business and had to reposition its business, which meant that huge personal sacrifices for the staff (pilots having their longterm route plans changed entirely, marketing campaigns being scrapped). However, because the actions taken at management level had always been shared with staff in a transparent manner, the mistake was admitted honestly and the motivation behind the new direction was clearly explained, the airline was able to change it’s structure and strategy with the backing and great assistance of its staff. It’s very easy to be lax and let an organisation become a siloed entity, with every department covering its own back but, at times like these, it is corporates that move together with a defined purpose that will be in a stronger position.
So, everyone makes mistakes and these can be corrected if identified quickly. But in terms of volatility, it’s unlikely many businesses will have been faced with what landed on Go’s plate three years after it had started. Having launched in 1998, the airline had just begun to turn a profit at the beginning of the decade. Shortly after achieving this accomplishment, terrorists flew two aeroplanes into New York’s World Trade Center towers, and the bottom fell out of the airline industry. This was an event that would take out some huge national carriers, so the task to keep operating that Go faced was daunting in the extreme. However, even (or maybe, especially) in times this bad, Cassani urged the treasury and finance professionals in the auditorium to find a way to turn an advantage. At Go, they wrote to all of their suppliers and asked them to reduce their prices. Which, as an act on its own, would be dismissed out of hand by anyone in business. However, in the Go letter, they also shared their corporate vision for growth in the business going forward and how this could be accomplished. By supplying at a reduced rate in the short term, these suppliers would be looking at longer profits in the longer term. And, according to Cassani, this bold approached worked and around 50% came back with an improved price list. If you don’t ask, you don’t get! Some other useful advice from Cassani included:
- Slay ‘sacred cows’. If a function in the business is losing money, but the old argument that it is ‘strategically important’ is used, find a way to get rid of it, for the good of your business.
- In these troubled times, try worrying about the clients and business you already have, not your own personal career. If your core business continues to be happy with you, they’ll keep coming back.
- Fix your mistakes. People will follow you if you are honest about this. And don’t use management jargon - be direct with colleagues. They’ll respect you for this.
- Let your staff take some risks - trust becomes reciprocal.
Post 7: Question Time, Live from Manchester (24 April 2009)
Four treasury and finance professionals faced a grilling from broadcaster John Humphrys as he tried to tease out some details of where the UK economy is heading next.
To wrap up the ACT Annual Conference 2009, four senior finance professionals risked their reputations as they took to the stage to be probed by legendary BBC television and radio presenter, John Humphrys. The panel in question was Barbara Cassani - executive chairman of Jurys Inns, Trevor Williams - chief economist at Lloyds TSB Corporate Markets, Paul Boyle - CEO of the Financial Reporting Council (FRC), and Alistair Clarke - former executive director and advisor to the governor at the Bank of England.
First up, and a timely place to start, Humphrys asked the panel what they had made of the recent UK Budget announcement, did they feel positive or negative about the details? Cassani from Jurys Inn said that, while she was encouraged that the budget did show the government understood the scale of the downturn the UK economy is on, she was very dispirited by the growth predictions it makes. Williams from Lloyds TSB, agreeing with the minor positive from Cassani, pointed out that it was at least a realistic Budget in terms of UK debt levels, particularly the public debt. Boyle at FRC said people will have to face up to a lower standard of living because of the massive public debt, and added that the increase of the top rate of income tax for top earners to 50% was a mistake as it won’t raise much revenue, while at the same time it will dispirit the brightest and the best at the top of industry, particularly within corporations. Clarke, again trying to find some positives, said that there was really very little room for maneuver for UK chancellor Alistair Darling, but that the debt implications were alarming. When the audience was polled if they thought Darling had got it right with the Budget, just three people raised their hands, with the vast majority opposing this view.
Another pertinent question, when thinking about the theme of the conference, asked what the key facets of the ‘new normal’ are in the corporate environment. Cassani from Jurys Inns said that she thinks corporates have to change the way that they strategically look at themselves, which won’t be much fun. Clarke highlighted his belief that there will be a shift in the power of borrowing between borrowers and lenders, as we move into times where lenders are increasingly cagey, borrowers are in for some very uncomfortable times. Lloyds TSB’s Williams stated that deleveraging is the ‘new normal’, but that gearing is ok as long as both the borrower and lender are happy with this. Boyle from the FRC highlighted the growth in focus on, and importance of, risk management: “Unlikely events are still unlikely, but not as unlikely as we thought.” However, he stated that the FRC does not want to see excessive regulations brought into the corporate sector. This question helped provoke a lot of theories, but as one of the panelists commented, “It’s hard to make predictions. Especially predictions about the future.” In times of great volatility such as these, treasurers need to be flexible and have a variety of contingency plans in place for many different scenarios. This preparedness should be the new normal, as the markets and global economies will not be ‘normal’ for a long time to come.
To underline this point, one ominous question asked if pensions are the next ticking time bomb for corporates. This was met with an immediate “yes!” from Cassani, who argued that the only good thing to happen to the pensions market recently was that some companies have moved away from the defined benefits model. If the credit crisis had hit seven or eight years earlier, the pensions industry would have face an even greater catastrophe. Williams from Lloyds TSB put the simple equation on the table: “Is enough being set aside in the UK for people in their old age? No!” It is a fundamental flaw in the UK’s economy, we’ve not saved enough and have spent too much, and this is crystalised in the pensions issue. Boyle from the FRC brought a regulatory perspective to the debate, pointing out that there has been a lot of criticism for accounting standards of pensions for being too tough. Well, Boyle agrees that they should be criticised, but for precisely the opposite reason, for being far too lax. He finished with the stark warning that, if corporates are not very careful, the huge risks associated with defined benefit pensions will sink many organisations.
While the answers to many of these questions, and indeed the themes of many speeches this conference, were depressing at best and catastrophic at worst, the mood among many attendees and presenters was constructive, clear and positive - ok we’re in this enormous financial black hole, but how can we implement best practices to enhance our treasury operations, help our organisation, and prepare to come out of the other side of the turmoil in a robust position. By focusing on key banking relationships, enhancing speed and quality of performance through targeted use of technology, and by simply communicating - with each other, with the Board, with other business units - treasurers will play a critical role in business survival and recovery.
No comments:
Post a Comment